Innoviva, Inc. (identified in this 2015 filing as Theravance, Inc.) — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results are for continuing operations unless noted. The company had separated its research and drug-development business into Theravance Biopharma in June 2014; the 2014 comparison therefore includes discontinued operations in reported net loss.
Business context
The company’s continuing business was principally managing royalty interests in respiratory products partnered with GlaxoSmithKline (GSK), including RELVAR/BREO ELLIPTA and ANORO ELLIPTA. It reported 13 employees at September 30, 2015. Most potential future revenue depended on GSK’s development and commercialization of the partnered products.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net revenue | 2015: $13.6 million; 2014: $1.0 million | 2015: $31.1 million; 2014: $1.2 million |
| Operating income (loss) | 2015: $8.4 million; 2014: $(9.5) million | 2015: $14.3 million; 2014: $(34.1) million |
| Net income (loss) | 2015: $(4.6) million; 2014: $(21.3) million | 2015: $(23.1) million; 2014: $(152.5) million, including $94.9 million of discontinued-operations loss in 2014 |
| Net loss per share | 2015: $(0.04); 2014: $(0.19) | 2015: $(0.20); 2014: $(1.37), including discontinued operations |
| Operating cash flow | Not separately presented | 2015: $3.2 million provided; 2014: $126.1 million used |
For the nine months, royalty revenue before amortization of GSK fees was $40.8 million, versus $8.0 million in 2014; the net royalty revenue reported in the financial statements was $30.4 million versus $0.3 million. Revenue growth reflected higher RELVAR/BREO sales, ANORO’s commercial launch in 2014, and U.S. approval of BREO for asthma in April 2015. Operating expenses declined: R&D was $1.9 million, down 72%, and general and administrative expense was $14.9 million, down 48%, year over year. The company reported no income tax expense for the 2015 periods.
Interest expense was $13.1 million for the quarter and $38.8 million for the nine months, up 6% and 59%, respectively, from 2014, primarily reflecting the 9% non-recourse notes issued in 2014 and accrued interest shortfalls. Operating margin was approximately 62% for the quarter and 46% for the nine months; these figures do not reflect interest expense.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $78.7 million and short-term marketable securities were $127.4 million, totaling $206.2 million in cash, cash equivalents and marketable securities at September 30, 2015, down $77.1 million from year-end 2014.
- Current assets were $223.8 million and current liabilities $11.3 million. Stockholders’ deficit was $323.0 million; accumulated deficit was $1.697 billion.
- Long-term debt carried at $744.1 million: $255.1 million of 2.125% convertible subordinated notes due 2023 and $489.0 million of 9% non-recourse notes due 2029. The latter’s principal had increased by $39.0 million from interest shortfalls since issuance. Its repayment is secured by 40% of specified GSK royalties.
- Cash dividends paid in the first nine months totaled $87.1 million, or $0.75 per share. Financing cash outflow was $81.1 million. Investing activities provided $59.9 million, largely from marketable-security maturities and sales.
Management stated that available resources and future royalty cash flows were expected to fund operations for at least 12 months, including the announced repurchase plan, based on current plans and forecasts. This depends on royalty receipts and the company’s capital needs.
Changes, outlook and notable developments
- The substantial improvement in continuing-operations results versus 2014 reflected increased royalties and lower post-spin-off operating costs, partly offset by higher interest expense. The 2014 nine-month net loss is not directly comparable because it includes the discontinued research and development business.
- GSK reported third-quarter product sales of $97.8 million for RELVAR/BREO and $32.7 million for ANORO. These are partner-reported product sales, not Theravance revenue. The filing noted that sales and commercialization remained below expectations in the broader context, with U.S. pricing and payer access challenges.
- On October 28, 2015, after quarter-end, the board approved a $150 million share repurchase program through the end of 2016, replacing the quarterly dividend. A modified Dutch auction tender offer for up to $75 million at $8.50–$9.25 per share began October 30. Repurchases were not guaranteed and could be suspended.
- Key risks include reliance on GSK for substantially all royalty revenue; product demand, competition, pricing and reimbursement pressure; clinical and regulatory uncertainty; and debt obligations. The company also guaranteed Theravance Biopharma’s assigned facility leases if that company defaults: remaining payments through May 2020 were $29.1 million, with a recorded guarantee liability of $1.3 million.
- The filing states that the September 2015 SUMMIT study did not meet its primary endpoints. It also describes uncertainty around future clinical and regulatory outcomes and the potential effect of GSK’s portfolio-wide commercialization decisions.
The filing’s MD&A revenue table gives nine-month 2015 net royalty revenue as $30.499 million, while the financial statements and accompanying note report $30.449 million. Investors should verify the correct figure in the filed statements.
Important facts for investors to verify
- GSK product sales, royalty calculations, deductions and the timing of cash receipts, particularly given commercialization and payer-access risks.
- Debt-service requirements and the growth or repayment trajectory of the 2029 non-recourse notes, including the royalty cash flows pledged to them.
- The effect of the $150 million repurchase plan and tender offer on liquidity, ownership concentration and future capital returns.
- Clinical and regulatory developments, including the consequences of the SUMMIT results and the progress of partnered respiratory programs.
- The revenue-table discrepancy noted above and comparability of 2014 results following the spin-off.